Global Economics

Hungary Tells the IMF to Take a Hike

After a breakdown in weekend talks over its deficit-cutting plans, Hungary says it will work with the EU but not the IMF going forward

Hungarian Prime Minister Viktor Orban is sticking to his government's position that the country will not impose further austerity measures and has said that there is "no point" in continuing talks with the International Monetary Fund.

"Hungary and the IMF had a deal, which expires in October. So there is no point in negotiating long-term questions with the IMF," the conservative Mr Orban said in Berlin on Wednesday (21 July) following a meeting with German Chancellor Angela Merkel.

He said that the country should walk away from dealing with the international lender and negotiate only with the EU. "Once it expires, we no longer have to negotiate with the IMF, but with the European Union...We have to agree with the EU, not with the IMF, how we will reduce our budget deficit...to less than three percent," he said.

At the weekend, the IMF and the EU abruptly called off talks with Hungary over their review of Budapest's €20 billion bail-out, originally agreed in 2008. The two parties complained at the resistance on the part of Mr Orban's new administration to reducing the country's deficit to GDP ratio to below three percent in 2011.

The prime minister's negotiators had tried persuade the EU-IMF team for some leeway in 2011 after agreeing to abide by this year's 3.8 percent of GDP goal.

Brussels and Washington also criticised Budapest for plans to impose a financial services and insurance firm levy, aiming to raise half a billion euros (187 billion forints), saying it would scare investors.

The IMF said the levy "is likely to adversely affect lending and growth."

On Monday, the forint tumbled against the euro and the stock market slid. The next day, Hungary's borrowing costs climbed after a failed auction of government debt. Stocks and the forint have however since stabilised.

Despite the pressure, Mr Orban appears unwilling to back down. Analysts believe he is keen to avoid what happened to the Socialist administration his Fidesz party trounced in the general election earlier this year. Having successfully slashed country's deficit from 9.3 percent of GDP in 2006 to 3.8 percent two years later through grinding austerity, the Socialists saw their support all but vanish.

Waiting in the wings, should Fidesz tumble, is the far right Jobbik party, who won 17 percent in the same elections. Mr Orban is looking over his shoulder at the anti-gypsy but also anti-capitalist party, with local elections scheduled for October.

Mr Orban appeared to win some support from Ms Merkel, who told reporters: "Hungary in the long term must return to a stable footing. With a deficit of 3.8 percent it doesn't look that bad, although we have to look at next year."

She did however side with the IMF and EU over the proposed financial services levy, saying that a similar EU proposal was intended to be used to create a rescue fund for future economic crises, and not for general government revenues.